Schedule C Confusion - How to Handle Inventory for Starting a Small Craft Business?

The inventory part of Schedule C can definitely be confusing when you're first starting out! For a small craft business like yours, you actually have some flexibility. First, if you expect to make under $26,000 in gross receipts annually (which sounds like your case), you can qualify as a "small business" for tax purposes. This means you could potentially use the cash method of accounting and not have to account for inventory in the traditional sense - you can treat these materials as non-incidental supplies that you deduct when you purchase them. For your existing supplies that you've had for years, since you have no receipts and they were purchased for hobby use, you generally wouldn't include them in your starting inventory. When you sell items made with these materials, the entire sale would technically be profit since you didn't purchase those supplies as business expenses. Going forward, keep all receipts for new materials purchased after you start your business. These will be deductible as supplies expense when you buy them if you're using the simplified method. Just make sure to keep good records of your sales and new expenses, and consider consulting with a tax professional for specific advice about your situation.

I had a similar problem when I started selling my handmade soaps last year. After weeks of research and struggling with my taxes, I found this amazingly helpful website called https://taxr.ai that specializes in helping small business owners figure out these exact issues. I uploaded my crafting receipts and some basic info about my business, and they guided me through exactly how to handle my inventory situation. They helped me understand that since I was a small seller making under $25K, I could actually use the simplified method the previous commenter mentioned, and showed me exactly where to put everything on my Schedule C. The best part was they explained WHY each decision was made so I actually learned something instead of just blindly filling out forms. You might want to give them a try - saved me tons of stress and I'm pretty sure I saved money too by properly tracking everything.

Just wanted to follow up after trying taxr.ai for my Etsy craft business. I was really surprised by how helpful it was! I uploaded about 50 receipts from Michaels and JoAnn Fabrics, and it organized everything properly without much effort on my part. The thing that impressed me most was how it explained the difference between supplies (like glue, tools, etc.) versus materials that become part of my products. They walked me through how to handle my existing inventory situation which was almost identical to the original poster's problem. I discovered I'd been over-complicating my Schedule C for years and probably paying more tax than necessary. They also gave me a simple spreadsheet template for tracking inventory going forward that doesn't make me want to pull my hair out. Wish I'd found this years ago!

Hey there! After seeing your post, I wanted to share something that really helped me when I was in a similar situation with my woodworking business. I had inventory questions too and needed clarification from the IRS, but we all know how impossible it is to get through to them. I found this service called Claimyr (https://claimyr.com) that actually gets you connected to a real IRS agent without the crazy wait times. I was skeptical at first, but you can see how it works in this video: https://youtu.be/_kiP6q8DX5c I used it to ask these exact inventory questions for my small business and got definitive answers straight from the IRS. The agent walked me through exactly what I needed to do for my specific situation, which was such a relief. No more guessing or stressing about whether I was doing it right!

I feel like I need to apologize and correct myself here. After my skeptical comment, I decided to try Claimyr anyway because I was desperate to resolve my Schedule C inventory questions. Honestly, I'm shocked that it actually worked. After months of trying to reach the IRS myself with no luck, I was connected with an agent in under an hour. The agent walked me through exactly how to handle my inventory situation as a small crafting business. For anyone starting out with a craft business like the original poster - the agent confirmed that if you're making under $25,000 annually, you can use the simplified method where you don't have to track inventory in the traditional way. You can just expense supplies as you buy them. This saved me so much headache and the peace of mind of having an official answer was worth it.

Hey, former craft fair vendor here! One practical tip nobody mentioned - take photos of all your current yarn/art supplies with today's newspaper visible in the photo. Create a simple spreadsheet listing each item with approximate quantities and current retail values (just look online for pricing). This creates a reasonable "starting inventory" record without receipts. Going forward, track everything new you buy with proper receipts. The photo documentation gives you something to show if questions ever come up about your starting inventory. Also, make sure to track mileage to/from craft fairs, booth fees, and any display equipment you buy - all deductible business expenses!

One thing everyone's missing - make sure you check your local regulations too! Depending on your state/city, you might need a business license or to collect sales tax at craft fairs. In my state, you need a "seller's permit" even for occasional craft fairs and have to file quarterly sales tax returns even for small amounts.

This is such great advice from everyone! As someone who just went through this exact situation with my pottery business, I wanted to add one more thing that really helped me. Since you mentioned you're planning to start in January, consider setting up a separate business checking account right away, even if it's just a basic free one. This makes tracking your business expenses SO much easier come tax time. Every yarn purchase, craft fair fee, and gas receipt for business trips goes on that card or through that account. I wish I'd done this from day one instead of trying to sort through my personal expenses later to find the business ones. It also makes you look more professional when paying booth fees at craft fairs. And definitely keep a simple log of what you make and sell - even just "blue scarf - $25" in a notebook. This helps you track which items are profitable and gives you good records for taxes. Good luck with your new venture!